Hedge fund

The Cayman Islands is the jurisdiction of choice for the establishment of offshore funds. Approximately 85% of the world’s hedge funds are domiciled in the Cayman Islands outranking the competing jurisdictions of BVI, Bermuda and Jersey. The Cayman Islands has three times as many Funds as the second most popular offshore jurisdiction for funds, the BVI.

The Cayman Islands are attractive to hedge fund promoters for many reasons, some of which are listed below:

Advantages of establishing a Hedge Fund in the Cayman Islands:

The Cayman Islands is a stable jurisdiction with a legal system based on common law.

Speed to market – Funds can be established and registered quickly in the Cayman Islands.

Cayman Islands does not impose material conditions on the terms of securities offerings by open-ended funds to non-retail investors.

No requirement to have Cayman based directors or officers, managers, administrators or custodians.

No limit to the asset classes which a fund can acquire or the leverage it may employ.

Highly professional service providers, lawyers, accountants etc. are located in the Cayman Islands.

Generally there is no Cayman tax applicable to the establishment and operation of funds – there are no corporate gains, income or withholding taxes if any nature.

Cayman has full membership of IOSCO and has been commended by the IMF for having strong compliance with regards to anti-money laundering.

As from August 2009 Cayman is on the OECD’s whitelist of countries complying with the global standard for tax cooperation and exchange of information.

Establishing a Cayman Island Hedge Fund:

The Mutual Funds Law (2003 Revision) (the Cayman MFL) regulates all mutual funds established in, or operating from, the Cayman Islands.

Hedge funds established in the Cayman Islands will typically take the form of either a company, a limited partnership (the most common form) or a unit trust. In practice most registered funds are set up as exempted companies limited by shares as this is the simplest vehicle to establish and administer.

Below is a brief description of the establishment of a standalone Cayman Islands Hedge Fund (see Appendix 1 for summary). Assumptions are made that the Fund will not be set up as a retail fund or a close ended fund but will offer redeemable equity securities to investors in minimum subscriptions of USD 100,000 or more.

Appendix 1 – Fund Establishment Flowchart

Stage 1 – Commercial Structuring:During this stage there are a number of factors which need to be considered (see Appendix 1) in addition to selection of an investment management vehicle. Whilst there is no need for this entity to be a Cayman Company these are normally used in order to qualify for annual exemption.

Stage 2 – Prepare draft documents:A draft offering document is prepared describing the shares in all material respects and containing information as necessary to enable a prospective investor in the Fund to make an informed decision.

Draft constitutional documents enshrining share rights and subscription agreements governing the terms on which investors will subscribe for shares and containing subscriber eligibility representations and anti-money laundering KYC requirements are also be prepared.

Stage 3 – Incorporation:The fund can be established at this stage and the tax exemption certificate can be applied for. The tax exemption certificate guarantees exemption from all Cayman taxes for 20 or 30 years irrespective of any subsequent change in the Law.

Stage 4 – Functionaries:The Fund will need to negotiate terms with and appoint key functionaries. The Fund will ordinarily require at least two directors who will be responsible for the supervision of the fund. For day to day management an investment manager should be appointed.

There is no requirement for directors to be Cayman residents and often officers of the investment manager will act as directors. Independent directors can be appointed.

An Administrator is required to be located in Cayman or another jurisdiction approved by the CIMA (Cayman Islands Monetary Authority) as having an equivalent anti-money laundering KYC regime. The Administrator will be responsible for calculation of the net asset value of the Fund, the processing of subscriptions and redemptions and the compliance with AML requirements applicable to the Fund’s Investors.

The Fund will also be required to appoint one or more independent Custodians and an auditor approved by CIMA to prepare and file accounts and submit other financial and operating information in respect of the Fund to CIMA.

Stage 5 & 6 – Finalise documentation and agree operational guidelines:During these stages commercial terms will need to be agreed and documents finalised and executed with functionaries in addition to the operating procedures of the functionaries being confirmed.

Stage 7 – CIMB Filing:The offering and constitutional documents are finalised and approved and the documents required to establish the Fund are filed with CIMA. The CIMA does not normally raise any issues on the documents filed for a Registered Fund and will normally issue a fund registration within 7 working days. From this point the Fund may begin accepting subscriptions from Investors as a registered Cayman Fund.

Fees:

The total costs for setting up a Cayman Islands Hedge Fund will include the following:

The incorporation costs of the vehicle required – see below

The on-going annual fee – see below

The annual administrators fee – variable

The annual auditors fee – variable

The initial registration fee of the fund with CIMA and annual fee to maintain the funds registration – see below

Legal fees – variable

Fees – Cayman Island Exempt Company:

Description

Fee (USD)

Incorporation of a Cayman Islands Exempt Company

Registration

Government Fees

Registered Office Fee

Registered Agent Fee

4,225.00 USD

Renewal Fees:

Government Fees – must be paid on 1st Jan each year

Registered Office & Registered Agent Fees – payable on date of incorporation the following year

732.00 USD1,500.00 USD

Fees – Cayman Islands Limited Liability Partnership:

Description

Fee (USD)

Incorporation of a Cayman Islands Exempt Company

Registration

Government Fees

Registered Office Fee

Registered Agent Fee

Courier Fee

5,150.00 USD

Renewal Fees:

Government Fees – must be paid on 1st Jan each year

Registered Office & Registered Agent Fees – payable on date of incorporation the following year

1,220.00 USD1,625.00 USD

Additional Fees:

CIMA Fee for initial and annual registration – 3,700.00 USD

Tax Exemption Certificate (optional) – this proves that the management company will be exempt from taxes in the Cayman Islands – Approx. 2,500.00 USD

Professional service fees – will be quoted for on an individual basis. Fees range from 20,000 – 25,000 USD.

Appendix 2 – General Summary of Characteristics of a Cayman Islands Fund

Regulatory Authority

Cayman Islands Monetary Authority

Type of Vehicle

Company (exempted companies), unit trust, limited partnership

Type of Fund

Open or close ended funds or a combination of the two

Close ended funds are unregulated

Licensing / registration requirements

Non-retail open ended funds registered with CIMB

Retail funds must either be licensed or employ licensed administrator

Prospectus required on registration / licensing of funds

Companies Registry

Annual filing and Annual fees required

Limited information available publically

Financial Statements

Audited financial statements to be filed with CIMA and signed off by local auditor

Directors

No residential requirement

Corporate Directors acceptable

CIMA require a minimum of 2 directors for registered funds

Shareholders Meetings

No requirement for annual meeting

Managers

No licensing requirements if Securities Investment Business Law exemption applies

Simple annual registration & filing would then be required

Investment restrictions

None

By Laws / Constitutional Documents

M&AA

May be amended by shareholders

Transfer of Shares

Unrestricted (unless otherwise stated in M&AA)

Currency

Multi-currency funds permitted

Administrator

No requirement for local administrator

Cayman administrators licensed under Mutual Funds Law

Custodian

No Custodian requirements

Investment Advisor

No licensing requirements if Securities Investment Business Law Applied

Simple annual registration and filing would be required

Set up time

Company incorporation – 1-2 working days

Registration with CIMA – 4-7 working days

Taxation

No income, capital gains or corporation tax

Government undertaking that no taxation will be levied on the income or property of the fund for 20 years.